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Potential
changes to securities laws could decrease the
number of households qualifying as accredited investors from approximately 8.5
million to 3.7 million. These accredited investors are the primary source
of early stage capital for startups and small businesses.

If the rules are changed as feared, then
startups will find it much more difficult to find early stage investors, thus stifling
our startup ecosystem and ultimately killing job creation and economic growth.

(For greatest effect - customize the message to add your own thoughts - your comment will then be listed separately)

The SEC is currently in the process of revising these laws
pursuant to the Dodd-Frank Act and in particular is considering whether the
financial thresholds to qualify as an accredited investor should be raised. Such a change would be devastating for
startups.

The Definition

An
accredited investor
is a person that the SEC deems is sophisticated enough to protect themselves in
making investment decisions and therefore does not require certain additional
protections under certain securities laws. Currently, to be an accredited
investor as an individual, you must (1) earn $200,000 (or $300,000 jointly with
your spouse) in income over the last 2 years or (2) $1 million in net worth
(excluding home value).

A
Large Increase in the Accredited Investor Dollar Thresholds would be Disastrous

“According
to the Center for Venture Research, 70,730 entrepreneurial ventures received
angel funding in 2013… Kauffman
Foundation research has established that were it not for new businesses, there
would be no net job growth in the U.S. Economy.”[2]

Bottom Line: Angel funded companies hire often and aggressively for high quality jobs.

An increase in the accredited investor thresholds
would substantially disrupt the startup funding ecosystem, destroying jobs and
the U.S.’s competitive advantage. Ultimately,
such a change could lead to a stagnated U.S. economy and talent and capital
being diverted to other parts of the world.

No
Tangible Benefit to Increase

At the core of any policy decision is a cost-benefit
analysis. We have not seen any evidence that
an increase to these thresholds would have any substantial positive effect on
investor protection.

According to the GAO, Investor and industry
associations said that “any changes to the thresholds might provide only
marginal increases to investor protection” and that “increasing the thresholds
would limit capital formation.”

The Wrong Metrics

The
definition relies solely on financial metrics and ignores any other factors.
Consider that the following people are probably not accredited investors (i.e.
not sophisticated enough to protect themselves):

Some
of these people are charged with protecting other members of the public, yet
they are not deemed to be able to protect themselves.

The
definition is fundamentally flawed by assuming that a person’s wealth or income
determines how sophisticated they are. A
person’s experience, knowledge and credentials should be determinative of their
need for protection from the government, not how much money they have.

Unequal
Treatment under the Law

Additionally, a pure financial
standard does not treat all citizens equally. It ignores cost of living
discrepancies across the country. $200,000 in New York City is a lot
different than $200,000 in Houston, TX. The standard disproportionately
excludes people in lower cost of living areas. People in Houston in the
same financial condition should have the same opportunities to invest in
startups as people in New York. Even more stark, the joint marriage
threshold (i.e. $300,000 jointly for married couples) inappropriately excludes certain same sex couples.

Generally,
in order to invest in private companies, a person must be an “accredited
investor.” People falling outside of the
“accredited investor” definition are not allowed to invest in any private
companies. Thus these affected individuals
in lower cost-of-living areas or in same sex couples are therefore disproportionately
prohibited from participating in the wealth creation occurring in the private
markets (see WhatsApp: acquired for $19 billion without ever touching the public markets).

The
ultimate goal here should be that the accredited investor definition is refined
so that (i) it treats people fairly and equitably and that it is based on real
metrics indicating sophistication and (ii) is based on publicly available or
non-sensitive information so that people will be comfortable verifying their
accredited investor status.

The only way to treat people equally under the law is to
look to knowledge and experience based standards.

Knowledge and Experience Based Standards should Prevail

Here are some proposed categories of
people who should be deemed by be able to “fend for themselves” and therefore
should be added to the accredited investor definition:

Passing
a Test. Individuals who pass a
standardized accredited investor test with publicly available test results.

By
Order of a Court, the Commission, a State Securities Administrator or
other governmental entity. An established governmental authority should
be able to determine that a person is capable of fending for themselves
with respect to investments. This
would allow for more of a real-world practical approach to the application
of the definition.

Each
of these items is far more likely to indicate financial sophistication versus a
blanket financial threshold. Individuals
may have acquired wealth by inheritance or may have saved their entire lives to
accumulate $1M in net worth. Those
individuals are no more likely to be sophisticated than, for example, a person
with a MBA degree.

Our Recommendation

We’ve submitted a comment letter to the SEC to urge
the Commission to:

Restrain from increasing the dollar
thresholds of the accredited investor definition. If such an increase is required, it must be
indexed to inflation starting from today and not retroactively.

Modify the definition to provide for
additional knowledge and experience mechanisms to becoming an accredited
investor as described above.

Conclusion

The SEC is currently seeking public comment on these
rules and your voice is critical. Please
join the cause by joining our Thunderclap: